Objective information about financial planning, investments, and retirement plans

Am I on Track for Retirement?

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Financial advisors are frequently asked some version of the question “Can I Retire?”  The Employee Benefit Research Institute (EBRI) recently released its 2018 Retirement Confidence Survey. The latest survey offered several key findings:

  • Only 32% of retirees surveyed felt confident that they will be able to live comfortably throughout their retirement.
  • Retiree confidence in their ability to over basic expenses and medical expenses in retirement dropped from 2017 levels.
  • Less than one-half of the retirees surveyed felt confident that Medicare and Social Security would be able to maintain benefits at current levels.

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It is essential that Baby Boomers and others approaching retirement take a hard look at their retirement readiness to determine any gaps between the financial resources available to them and their desired lifestyle in retirement. Ask yourself a few questions to determine if you can retire.

What kind of lifestyle do you want in retirement?

You’ll find general rules of thumb indicating you need anywhere from 70% to more than 100% of your pre-retirement income during retirement. Look at your individual circumstances and what you plan to do in retirement.

  • Will your mortgage be paid off?
  • Do you plan to travel?
  • Will you live in an area with a relatively high or low cost of living?
  • What’s your plan to cover the cost of healthcare in retirement?

Remember spending during retirement is not uniform. You will likely be more active earlier in your retirement.  Though you may spend less on activities as you age, it is likely that your medical costs will increase as you age.

How much can you expect from Social Security?

Social Security benefits were never designed to be the sole source of retirement income, but they are still a valuable source of retirement income. Those with lower incomes will find that Social Security replaces a higher percentage of their pre-retirement income than those with higher incomes.

Recent news stories indicating that the Social Security trust fund is in trouble is not welcome news for those nearing retirement or for current retirees.

What other sources of retirement income will you have?

Other potential sources of retirement income might include a defined-benefit pension plan; individual retirement accounts (IRAs); your 401(k) plan, and your spouse’s employer-sponsored retirement plans. If you have other investments, it is important to have a strategy that maximizes these assets for your retirement.

If you are fortunate enough to be covered by a workplace pension, be sure to understand how much you will receive at various ages.  Look at your options in terms of survivor benefits should you predecease your spouse.  If you have the option to take a lump-sum distribution it might make sense to roll this over to an IRA.  Also determine if your employer offers any sort of insurance coverage for retirees. 

Where does this leave me? 

At this point let’s take a look at where you are.  We’ll assume that you’ve determined that you will need $100,000 per year to cover your retirement needs on a gross (before taxes are paid) basis.  Let’s also assume that your combined Social Security will be $30,000 per year and that there will be $20,000 in pension income.  The retirement gap is:

Amount Needed

$100,000

Social Security

30,000

Pension

20,000

Gap to be filled from other sources

$50,000

 

Where will this $50,000 come from?  The most likely source is your retirement savings.  This might include 401(k)s, IRAs, taxable accounts, self-employment retirement accounts, the sale of a business, and inheritance, earnings during retirement, or other sources. 

To generate $50,000 per year you would likely need a lump sum in the range of $1.25 – $1.67 million at retirement.

Everybody’s circumstances are different.  Many retirees do not have a pension plan available to them, some don’t have a 401(k) either.

Look at where you stand and take action 

Some steps to consider if you feel you are behind in your retirement savings:

  • Save as much as possible in your 401(k) or other workplace retirement plan while you are still employed
  • Contribute to an IRA
  • If you are self-employed start a retirement plan for yourself
  • Keep your spending in check
  • Scale back on your retirement lifestyle if needed
  • Plan to delay your retirement or to work part-time during retirement

Providing for a comfortable retirement takes planning. Don’t be lulled into thinking your 401(k) plan alone will be enough. If you haven’t put together a financial plan, don’t be afraid to enlist the aid of a professional if you need help.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Review Your 401(k) Account

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For many of us, our 401(k) plan is our main retirement savings vehicle. The days of a defined benefit pension plan are a thing of the past for most workers and we are responsible for the amount we save for retirement and how we invest that money.

Managed properly, your 401(k) plan can play a significant role in providing a solid retirement nest egg. Like any investment account, you need to ensure that your investments are properly allocated in line with your goals, time horizon and tolerance for risk.

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You should thoroughly review your 401(k) plan at least annually. Some items to consider while doing this review include:

Have your goals or objectives changed?

Take time to review your retirement goals and objectives. Calculate how much you’ll need at retirement as well as how much you need to save annually to meet that goal. Review the investments offered by the plan and be sure that your asset allocation and the investments selected dovetail with your retirement goals and fit with your overall investment strategy including assets held outside of the plan.

Are you contributing as much as you can to the plan?

Look for ways to increase your contribution rate. One strategy is to allocate any salary increases to your 401(k) plan immediately, before you get used to the money and find ways to spend it. At a minimum, make sure you are contributing enough to take full advantage of any matching contributions made by your employer. For 2018 the maximum contribution to a 401(k) plan is $18,500 plus an additional $6,000 catch-up contribution for individuals who are age 50 and older at any point during the year.

Are the assets in your 401(k) plan properly allocated?

Some of the more common mistakes made when investing 401(k) assets include allocating too much to conservative investments, not diversifying among several investment vehicles, and investing too much in an employer’s stock. Saving for retirement typically encompasses a long time frame, so make investment choices that reflect your time horizon and risk tolerance. Many plans offer Target Date Funds or other pre-allocated choices. One of these may be a good choice for you, however, you need to ensure that you understand how these funds work, the level of risk inherent in the investment approach and the expenses.

Review your asset allocation as part of your overall asset allocation

Often 401(k) plan participants do not take other investments outside of their 401(k) plan, such as IRAs, a spouse’s 401(k) plan, or holdings in taxable accounts into consideration when allocating their 401(k) account.

Your 401(k) investments should be allocated as part of your overall financial plan. Failing to take these other investment assets into account may result in an overall asset allocation that is not in line with your financial goals.

Review the performance of individual investments, comparing the performance to appropriate benchmarks. You shouldn’t just select your investments once and then ignore them. Review your allocation at least annually to make sure it is correct. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without any tax ramifications.

Do your investments need to be rebalanced?

Use this review to determine if your account needs to be rebalanced back to your desired allocation. Many plans offer a feature that allows for periodic automatic rebalancing back to your target allocation. You might consider setting the auto rebalance feature to trigger every six or twelve months.

Are you satisfied with the features of your 401(k) plan?

If there are aspects of your plan you’re not happy with, such as too few or poor investment choices take this opportunity to let your employer know. Obviously do this in a constructive and tactful fashion. Given the recent volume of successful 401(k) lawsuits employers are more conscious of their fiduciary duties and yours may be receptive to your suggestions.

The Bottom Line

Your 401(k) plan is a significant employee benefit and is likely your major retirement savings vehicle. It is important that you monitor your account and be proactive in managing it as part of your overall financial and retirement planning efforts.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Five Things to do During a Stock Market Correction

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The stock market had a brutal week, with the Dow Jones Industrial Average dropping over 1,100 points in the past two days alone. For the week the index was off over 1,400 points or approximately 5.7 percent. The S&P 500 experienced similar losses.

Facebook shares suffered a significant decline in the wake of revelations about the company’s failure to protect user data. Facebook shares fell 13.9 percent last week, leading social media and technology stocks lower for the week.

Add to this the likelihood of the administration imposing tariffs on imports from China and the Fed’s announcement of an interest rate hike and the markets reacted to a number of pressures last week.

Nobody can predict if this is the start of a major correction or just a normal blip on the radar. None the less, here are five things you should do during a stock market correction.

Do nothing

Assuming that you have a financial plan with an investment strategy in place there is really nothing to do at this point. Ideally you’ve been rebalancing your portfolio along the way and your asset allocation is largely in line with your plan and your risk tolerance.  Making moves in reaction to a stock market correction (official or otherwise) is rarely a good idea.  At the very least wait until the dust settles.  As Aaron Rodgers told the fans in Green Bay after the Packers bad start in 2016, relax. They went on to win their division before losing in the NFC title game.  Sound advice for fans of the greatest team on the planet and investors as well.

Review your mutual fund holdings

I always look at rough market periods as a good time to take a look at the various mutual funds and ETFs in a portfolio. What I’m looking for is how did they hold up compared to their peers during the market downturn. For example during the 2008-2009 market debacle I looked at funds to see how they did in both the down market of 2008 and the up market of 2009. If a fund did worse than the majority of its peers in 2008 I would expect to see better than average performance in the up market of 2009. If there was under performance during both periods to me this was a huge red flag.

Don’t get caught up in the media hype

If you watch CNBC long enough you will find some expert to support just about any opinion about the stock market during any type of market situation. This can be especially dangerous for investors who might already feel a sense of fear when the markets are tanking.  I’m not discounting the great information the media provides, but you need to take much of this with a grain of salt. This is a good time to lean on your financial plan and your investment strategy and use these tools as a guide.

Focus on risk

Use stock market corrections and downturns to assess your portfolio’s risk and more importantly your risk tolerance. Assess whether your portfolio has held up in line with your expectations. If not perhaps you are taking more risk than you had planned.  Also assess your feelings about your portfolio’s performance. If you find yourself feeling unduly fearful about what is going on perhaps it is time to revisit your allocation and your financial plan once things settle down.

Look for bargains

If you had your eye on a particular stock, ETF, or mutual fund before the market dropped perhaps this is the time to make an investment. I don’t advocate market timing but buying a good long-term investment is even more attractive when it’s on sale so to speak.

Markets will always correct at some point.  Smart investors factor this into their plans and don’t overreact. Be a smart investor.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Tax Reform and Divorce

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The tax reform legislation passed in late 2017 provides the most sweeping changes in the tax code in years. While there are a number of changes that will impact many of us in various ways, the changes in the tax treatment of alimony payments could have a profound impact on couples contemplating divorce.

Tax Reform and Divorce

Divorce is an emotional issue that can have a significant and lasting impact on the couple involved and their families. Divorce is also a significant financial event as well.

Alimony payments 

Under the current tax rules, alimony payments are a deductible expense by the ex-spouse making the payments. Generally, alimony payments are made by the ex-spouse with the higher income. The current rules shift the tax burden of these payments to the ex-spouse receiving the payments, who is often in a lower tax bracket.

The new rules that go into effect for divorces that are finalized after 2018 eliminates the tax deduction for alimony payments.

Under the current rules here’s how the alimony deduction would work at the federal level.

Income of ex-spouse paying alimony            $500,000

Federal tax bracket                                                 35%

Annual alimony payment                               $100,000

Tax deduction                                                   $35,000

After-tax cost of alimony                                 $65,000

Without the tax deduction the after-tax cost of the alimony increases to the full $100,000.

These changes could result in lower alimony payments going forward. The attorney for the alimony-paying ex-spouse could argue that the amount of alimony their client can now afford to pay will be reduced due to the loss of the tax deduction. If the argument is successful in reducing the amount of alimony, the ex-spouse receiving the payments will suffer financially on an ongoing basis as a result.

Boomers impacted

In a recent study, the Pew Research Center found that the rate of divorce among couples 50 and older more than doubled from 1990-2015. Many in this demographic are in high tax brackets and this change comes at a bad time for this group as they head into retirement. This is especially true if one spouse, often the wife in this age group, has been out of the workforce for a number of years raising children and/or serving as a caregiver to older family members.

Focus on divorce financial planning 

This change due to tax reform doesn’t change the fact that divorce is a major financial event that requires careful financial planning during the process by both spouses.

It is important the couple seek sound, unbiased financial guidance from a fee-only financial advisor to ensure that a settlement that is as fair and equitable for both spouses is reached. Moreover, decisions need to be made with as little emotion as possible. For example, keeping the family home may be a poor financial choice if the costs of ownership will be a strain on the ex-spouse receiving this asset. It is important that all marital assets be considered as part of this process.

For couples nearer to retirement it’s important to understand the rules governing Social Security benefits from ex-spouses. These rules remain intact and both spouses need to incorporate them in their retirement planning.

Summary

Overall the loss of this tax deduction is an incentive for couples looking to divorce to get things finalized in 2018 if possible. Delaying things until 2019 or beyond might result in a lower alimony payment and will result in less money for one or both ex-spouses. Pre-divorce financial planning remains a critical part of the divorce process.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

8 Portfolio Rebalancing Tips

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A previous post here on the blog discussed 4 Benefits of Portfolio Rebalancing. This post continues on the rebalancing theme and looks at some ways to implement a rebalancing strategy. In light of the recent volatility in the stock market, its important to review your asset allocation once the dust settles and consider rebalancing your portfolio if needed.

Here are 8 portfolio rebalancing tips that you can use to help in this process.

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Set a target asset allocation 

Your asset allocation should be an outgrowth of a target asset allocation from your financial plan and/or a written investment policy. This is the target asset allocation that should be used when rebalancing your portfolio. 

Establish a time frame to rebalance 

Ideally you are reviewing your portfolio and your investments on a regular basis. As part of this process you should incorporate a review of your asset allocation at a set interval. This might be semi-annually for example. I generally suggest no more frequently than quarterly. An exception would be after a precipitous move up or down in the markets.

Take a total portfolio view 

When rebalancing your portfolio take a total portfolio view. This includes taxable accounts as well as retirement accounts like an IRA or your 401(k). This approach allows you to be strategic and tax-efficient when rebalancing and ensures that you are not taking too little or too much risk on an overall basis.

Incorporate new money 

If you have new money to invest take a look at your asset allocation first and use these funds to shore up portions of your asset allocation that may be below their target allocation. A twist on this is to direct new 401(k) contributions to one or two funds in order to get your overall asset allocation back in balance. In this case your will need to take any use of your plan’s auto rebalance feature into account as well. 

Use auto pilot 

For those with an employer sponsored retirement plan such as a 401(k), 403(b) or similar defined contribution plan many plans offer an auto-rebalancing feature. This allows you to select a time interval at which your account will be rebalanced back to the allocation that you select.

This serves two purposes. First it saves you from having to remember to do it. Second it takes the emotion and potential hesitation out of the decision to pare back on your winners and redistribute these funds to other holdings in your account.

I generally suggest using a six-month time frame and no more frequently than quarterly and no less than annually. Remember you can opt out or change the interval at any time you wish and you can rebalance your account between the set intervals if needed.

Make charitable contributions with appreciated assets 

If you are charitably inclined consider gifting shares of appreciated holdings in taxable accounts such as individual stocks, mutual funds and ETFs to charity as part of the rebalancing process. This allows you to forgo paying taxes on the capital gains and provides a charitable tax deduction on the market value of the securities donated.

Most major custodians can help facilitate this and many charities are set-up to accept donations on this type. Make sure that you have held the security for at least a year and a day in order to get the maximum benefit. This is often associated with year-end planning but this is something that you can do at any point during the year.

Incorporate tax-loss harvesting

This is another tactic that is often associated with year-end planning but one that can be implemented throughout the year. Tax-loss harvesting involves selling holdings with an unrealized loss in order to realize that loss for tax purposes.

You might periodically look at holdings with an unrealized loss and sell some of them off as part of the rebalancing process. Note I only suggest taking a tax loss if makes sense from an investment standpoint, it is not a good idea to “let the tax tail wag the investment dog.”

Be sure that you are aware of and abide by the wash sale rules that pertain to realizing and deducting tax losses.

Don’t think you are smarter than the market 

It’s tough to sell winners and then invest that money back into portions of your portfolio that haven’t done as well. However, portfolio rebalancing is part of a disciplined investment process.  It can be tempting to let your winners run, but too much of this can skew your allocation too far in the direction of stocks and increase your downside risk.

If you think you can outsmart the market, trust me you can’t. How devastating can the impact of being wrong be? Just ask those who bought into the mantra “…it’s different this time…” before the Dot Com bubble burst or just before the stock market debacle of the last recession.

The Bottom Line 

Portfolio rebalancing is a key strategy to control the risk of your investment portfolio. It is important that you review your portfolio for potential rebalancing at set intervals and that you have the discipline to follow through and execute if needed.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

The Super Bowl and Your Investments

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Lombardi Trophy - Super Bowl XXXI

It’s Super Bowl time and once again my beloved Packers are not playing for the for the seventh consecutive year. They had a horrible season with Aaron Rodgers going down with an injury and their backup quarterback just not cutting it. The good news is that I was able to attend six regular season games at football’s holy shrine, Lambeau Field.

Every year the Super Bowl Indicator is resurrected as a forecasting tool for the stock market.

The indicator says that a win by a team from the old pre-merger NFL is bullish for the stock market, while a win by a team from the old AFL is a bad sign for the markets. Looking at this year’s game, New England is an original AFL team while Philadelphia is an original NFL team.

How has the Super Bowl Indicator done?

According Market Watch, this indicator failed to predict the direction of the stock market for the second year in row.  Denver won the 2016 game and the market had an up year. The Patriots won last year and 2017 was a stellar year for the markets. Overall the indicator has held true in 40 of the 51 prior Super Bowls.

Quoted in a Wall Street Journal article before the 2016 game, respected Wall Street analyst Robert Stoval said, “There is no intellectual backing for this sort of thing, except that it works.”

Some notable misses for the indicator include:

  • St. Louis (an old NFL team that was formerly and is now again currently the L.A. Rams) won in 2000 and the market dropped.
  • Baltimore (an old NFL team that was formerly the original Cleveland Browns) won in 2001 and the market dropped. Perhaps the markets were confused since the Browns became an AFC team (along with the Steelers and the Colts) as part of the 1970 merger.
  • The New York Giants (an old NFL team) won in 2008 and the market tanked in what was the start of the recent financial crisis.
  • In 1970 the Kansas City Chiefs shocked the Minnesota Vikings and the Dow Jones Average ended the year up, by less than 5 percent.

Is this a valid investment strategy?

As far as your investments, I think you’ll agree that the outcome of the game should not dictate your strategy. Rather I suggest an investment strategy that incorporates some basic blocking and tackling:

  • financial plan should be the basis of your strategy. Any investment strategy that does not incorporate your goals, time horizon, and risk tolerance is flawed.
  • Take stock of where you are. What impact has the bull market of the past eight plus years had on your portfolio? Perhaps it’s time to rebalance and to rethink your ongoing asset allocation.
  • Costs matter.  Low cost index mutual funds and ETFs can be great core holdings. Solid, well-managed active funds can also contribute to a well-diversified portfolio. In all cases make sure you are in the lowest cost share classes available to you.

View all accounts as part of a total portfolio. This means IRAs, your 401(k), taxable accounts, mutual funds, individual stocks and bonds, etc. Each individual holding should serve a purpose in terms of your overall strategy.

The Super Bowl Indicator is another fun piece of Super Bowl hype. Your investment strategy should be guided by your goals, your time horizon for the money and your tolerance for risk, not the outcome of a football game.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Resources to consider

Check out Personal Capital’s retirement planning tools to be sure you are on trackPersonal Capital can help you organize your entire financial picture and provide advice if needed.

Looking to learn more about investing and financial planning? Whether you do it yourself or work with a financial advisor, the Fire Your Financial Advisor online course from the White Coat Investor can help. Make this the year you invest in yourself. Be sure you have the knowledge and the tools to thrive in today’s complex financial environment.

(Note these are affiliate links, I receive a fee if you enroll at no extra cost to you)

My services

Need help getting your investments on track? Approaching retirement and want another opinion on where you stand? Check out my Financial Review/Second Opinion for Individuals service.

Financial advisors are you looking to ramp up your content marketing? Contact me regarding my ghost writing services for advisors.

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401(k) Options When Leaving Your Job

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Retirement Funds over Time

Perhaps you are retiring or perhaps you are moving on to another opportunity. Perhaps you were downsized. Whatever the reason, there are many things to do when leaving a job. Don’t neglect your 401(k) plan during this process.

With a defined contribution plan such as a 401(k) you typically have several options to consider upon separation.  Here is a discussion of several and the pros and cons of each. Note this is a different issue from the decision that you may be faced with if you have a defined benefit pension plan.

Leaving your money in the old plan 

I’m generally not a fan of this approach. All too often these accounts are neglected and add to what I call “financial clutter,” a collection of investments that have no rhyme or reason to them.

In some larger plans, participants might have access to a solid menu of low cost institutional funds. In addition, many of these plans tend to be among the cheapest in terms of administrative costs. If this is the case with your old employer’s plan, it might make sense to leave your account there. However, it is vital that you manage your account in terms of staying on top of changes in the investment options offered and that you reallocate and rebalance your account when applicable.

Unfortunately far too many lousy 401(k) plans are filled with high cost, underperforming investment choices and leaving your retirement dollars there may not be your best option.

Rolling your account over to an IRA 

This route not only allows for the consolidation of accounts which makes monitoring your portfolio easier, but investors often have access to a wider range of low cost investment options than might be available to them via their old employer’s plan.

Even for do it yourselfer investors, rolling over to an IRA is often a good idea for similar reasons. You will want to take stock of your overall portfolio goals in light of your financial plan to determine if the custodian you are using or considering to offers a range of appropriate choices for your needs.

Rolling your account into your new employer’s plan 

If allowed by your new employer’s plan, this can be a viable option for you if you are moving to a new job. You will want to ensure that you consult with the administrator of your new employer’s plan and follow all of their rules for moving these dollars over.

This might be a good option for you if your 401(k) balance is small and/or you don’t have significant outside investments. It might also be a good option if your new employer has an outstanding plan on the order of what was mentioned above.

Before going this route, you will want to check out your new employer’s plan.  Is the investment menu filled with solid, low cost investment options? You want to avoid moving these dollars from a solid plan at your old employer to a sub-par plan at your new company. Likewise you don’t want to move dollars from one lousy plan to another.

Other considerations

A fourth option is to take a distribution of some or all of the dollars in your old plan.  Given the potential tax consequences I generally don’t recommend this route.

A few additional considerations are listed below (I mention these here to build your awareness but I am not covering them in detail here.  If any of these or other situations apply to you I suggest that you consult with your financial or tax advisor for guidance.):

  • The money coming out of the plan is always taxable, except for any portion in a Roth 401(k) assuming that you have satisfied all requirements to avoid taxes on the Roth portion.
  • You will likely be subject to a penalty if you withdraw funds prior to age 59 ½ with some exceptions such as death and disability.
  • There is also a pretty complex method for those under age 59 ½ to withdraw funds and avoid the penalty called 72(t). Additionally there are complex rules for those who are 55 and older who wish to take a distribution from their 401(k) upon separating from their employer. In either case consult with a financial advisor who understands these complex rules before proceeding.
  • If your old plan offers a match there is likely a vesting schedule for their matching contributions.  Your salary deferrals are always 100% vested (meaning you have full rights to them).  Matching contributions typically become vested on a schedule such as 20% per year over five years. You will want to know where you stand with regard to vesting anyway, but if you are close to earning another year of vesting you might consider this in the timing of your departure if this is an option and it makes sense in the context of your overall situation.
  • If your company makes annual profit sharing contributions, they might only be payable to employees who are employed as of a certain date. As with the previous bullet point, it might behoove you to plan your departure date around this if the amount looks to be significant and it works in the context of your overall situation.
  • Another factor that might favor rolling your old 401(k) to your new employer’s plan would be your desire to convert Traditional IRA dollars to a Roth IRA now or in the future. There could be a tax advantage to be had by doing this, however please consult with your financial advisor here for guidance tailored to your unique situation.
  • If you are 70 ½ or older and still working, you are not required to take annual required minimum distributions from your 401(k) as long as you are not a 5% or greater owner of the company. This might also be a reason to consider rolling your old 401(k) to your new employer’s plan, again consult with your financial advisor.

There are a number of options for an old 401(k) or similar retirement account when leaving your employer.  The right course of action will vary based upon your individual circumstances.  The wrong answer is to ignore this decision.

Approaching retirement and want another opinion on where you stand? Check out my Financial Review/Second Opinion for Individuals service.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. 

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